Economy & Credit Chest

To compare both asset classes and tranches one needs to construct a corporatebond fund invested in 100 equally weighted BBB corporate bonds (assuming that the bond fund pays a Libor _ 100 bp and runs a maturity of 5 years). The risk/return tradeoff between a corporate bond fund and a BBB–CDO note looks as shown previously.

The BBB note sustains a higher cumulative default rate before suffering any losses, as the equity absorbs the initial losses. But the corporate bond fund may outperform in severe default scenarios. This is largely because of the leverage in the CDO note. At one stage the mezzanine notes become the equity of the structure. The huge difference in IRR is explained by the extra risk between the cash bonds and the BBB-tranche as a total.

Many people have trouble in coming up with new ideas or solutions to a problem. The answer often lies in fostering innovation, by creating the right conditions to be innovative or simply to see the best way forward. If this is to work and be sustainable, the climate for decision-making must be as positive, open and encouraging as possible. Linked with this is the need for people to feel valued. If they do not, there is a risk that they will be negative about the change, reactive rather than proactive.

Or they may decide to leave. One way of fostering innovation is to encourage employees to question the way things are done or decisions that have been made. Removing or minimising barriers (such as bureaucracy and hierarchy) can drive innovation, and so can an ability to exert mild pressure, perhaps by setting deadlines. Techniques that help spur creativity and innovation include brainstorming and mind mapping, as they help individuals to come up with ideas and to see patterns or organise information in such a way that patterns and ideas develop.

Effective decision-making depends on a collection of leadership skills that can be learnt and are often closely linked. These include the following:

• An ability to foster innovation and creativity and to exploit synergies between people, sometimes disparate and distant teams.
• The intelligence and courage to recognise and learn from mistakes.
• The perception and sensitivity to analyse competing options, and the ability to help others to find their solutions.
• Skills of delegation and empowerment so that decision-making can be devolved to others in the organisation with sufficient time or insight.
• The capacity to motivate people so that they are inspired to prevent or solve problems themselves, as well as proactively implementing decisions.
• An ability to focus others on the twin issues of serving customers and managing change.
• Skilled communication.
• The courage and ability to make critical decisions.